This piece originally appeared in the February 2023 edition of DS News magazine, online now [1].
Like the Starbucks or Chick-fil-A app, the process of applying for a mortgage continues to advance to a similar application. Between 2020 and 2022, with an increase in home buying due to low interest rates, originations were projected to be more than $2.5 trillion, adjusted down in 2023 to $1.98 trillion, which is 35-40% higher than average annual originations between 2010 and 2019 [2].
Post-COVID-19 pandemic surveys of consumers show that about 60% of purchase and refinance borrowers prefer an online mortgage application process with an emphasis on speed. Satisfaction levels drop by 15% [2] if the application decision takes more than 10 days. Beginning with post-financial crisis compliance spending fueled by Dodd-Frank CFPB requirements, technology investments have shifted to improving the borrower experience. Not only do customers prefer a streamlined process, but also technology can also be used to meet regulatory standards [3] such as fair lending. It also keeps loan approval processes as short as possible.
The latest technologies include artificial intelligence and machine learning coupled with user-focused tools such as:
- Application forms that automatically populate key information like name, address, and Social Security number
- Upload features for documents like tax returns, bank statements, and income documentation
- Verification tools that check income and employment with credit agencies in seconds
- Online instructions, frequently asked questions, digital chat boxes, and 24-hour call centers
The improved digital application process speeds up the experience with fewer mistakes. One Freddie Mac study [4] showed that mortgage lenders who incorporate digital mortgage technology reduce the average processing time by 63%.
Closing, Post-Closing, and Servicing
In addition, an after the application is approved, digital systems enable lenders, with the encouragement and support of Freddie Mac and Fannie Mae, to automate appraisal and title ordering, agent communication, and underwriting, as well as transition to post-closing requirements once the closing—possibly also held via a virtual, digital venue—is completed. The use of technology and digital platforms continues into servicing, which includes default servicing, of loans. Digital loan servicing systems generate reports, track repayments, calculate interest and fees, and, more importantly, provide the end-user borrower with the ability to manage and track their loan and request assistance. These systems include [3] the ability to facilitate servicing transfers, incorporate e-notarization and e-signatures, and with artificial intelligence (AI) programming, help predict economic factors that might impact loan performance, and in turn allow lenders, servicers, and investors to better prepare for defaults and loss mitigation.
Standard Bearers: Improving Client Experience and Reducing Costs
Research team Forbes Insights, in conjunction with Freddie Mac, studied the development and growth of digital mortgages, with a subtitle of “An Industry Race Toward the One-Hour Clear to Close.” One lender, United Wholesale Mortgage (UWM), stands out in the digital mortgage space, providing an entirely online experience, including electronic signing and digital documentation with payroll providers, and even FaceTime closings in certain states. Contrasted with the industry average of 40–42 days to close [5], UWM averages under 16 days to close and aims to meet a 10-day average to close.
Pulte Mortgage, a lender working with their own construction company and focusing on new construction, stands out as an early adapter of technology to improve customer experience and reduce costs. In 1995, Pulte began centralizing operations and standardizing core mortgage processes using a digital workflow vertically integrated system that coordinates functions between construction, loan services, and affiliate closing services (title and insurance). About 95% of Pulte customers opt to complete the application process online and then use dashboards provided to them to track progress. Estimates for cost savings range between 10–51%.
Digital Platform Default Servicing: A Work in Progress
While demand for new loans and refinances is the lowest in 22 years, loan servicing volumes are near pre-pandemic levels [5] as borrowers have been exiting forbearance programs, and foreclosure proceedings are up 132%. Default servicing costs are almost 10 times more expensive than the cost of servicing a performing loan, and thus default servicing could benefit from the efficiencies found in digital systems. Capital investment is reflecting more and more commitment to digital innovation in the servicing, especially default serving industries, where legacy systems, spreadsheets, and manual interaction is still the norm. Many servicing processes are slow, manual, fragmented, and ripe for disruption.
One trend to facilitate the use of digital technology in servicing appears to be growth in subservicers using digital platforms because lenders and investors often lack internal servicing capacity and prefer to outsource servicing while retaining mortgage servicing rights. Also, outsourcing servicing to subservicers shifts regulatory compliance requirements to subservicers, as well as allows servicers to avoid investment in technology, given the capital required for servicing. In the past two to three years, subservicers using digital technology and artificial intelligence have increased efficiency in the default space while improving borrower experience and strengthening compliance [6]. Much more work is needed, as the focus thus far appears to have been on originations and closings, with less focus on backend operations, including servicing and default servicing. It bears repeating: improved use of digital technology in default servicing is ripe for disruption. Think about solutions offered on Amazon and Overstock apps.